Efforts to recalibrate oil concession rules to be more market-friendly and open to foreign investment are starting to bear fruit

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A record-breaking offshore auction in Brazil last week that attracted $2.4bn in pledges underlined progress the country's oil sector has made since a regulatory overhaul was launched to repair its international image.

The bidding round on 29 March drew in the largest revenues in the country's history, with 13 companies from 11 countries taking part in the offshore round alone. ExxonMobil, along with Petrobras and Qatar Petroleum, spent $844m on a single block in the Campos basin, while Chevron, Repsol, Shell, BP and Statoil (soon to become Equinor) all spent big on others.

"The auction surpassed all expectations. We had diversity of operators, geographical diversity and extraordinary bonuses", said Brazil's state-run National Agency of Petroleum, Natural Gas and Biofuels (ANP) director-general, Décio Oddone, following the auction.

Twenty-two offshore blocks were acquired out of the 47 offered in the 15th bidding round, which is expected to generate minimum investments of $358m in the first phase of exploration alone, ANP said. The $2.4bn in signature bonuses was the highest amount ever posted for oil concession tenders, dwarfing the $1.1bn achieved in the 14th round in 2017.

Source: Petroleum Economist

The success follows a regulatory charm offensive that was launched in late 2016 to attract greater levels of offshore exploration and production. The reforms were prompted by stagnating investment levels and a desire to never again repeat a domestic oil sector crisis spawned by a massive corruption scandal, pervasive mismanagement and fallout from the oil-price crash.

The problems were underscored by a failed bidding round in December 2015 that saw oil regulator ANP sell just 37 of the 266 blocks on offer, with signature bonuses of around $29m. It was clear that strict local content rules under former president Dilma Rousseff were deterring investment interest from major foreign firms.

Aiming to create a more competitive, market-oriented auction model, in April 2017 the National Energy Policy Council (CNPE) approved sweeping changes to the concession regime, including a multi-year transparent bidding process, more flexible local-content policies, and the abolishment of the mandatory clause that Petrobras be the sole operator in pre-salt oilfields.

As part of the changes, local content requirements (LCR) for deepwater oil and gas exploration fell by 50% on average, to a minimum of 18%—down from 37% for previous auctions—and LCRs for deepwater production development will now follow macro-segments: 25% for oil or gas well construction; 40% for sub-sea production activities; and 25% for oil offshore production units.

Political clouds

It isn't just these incentives that are attracting the majors to Brazil's upstream. In a situation that draws parallels with Mexico, there are concerns that if they don't act now, they could face a different political landscape following a general election this year. Concerns that the reforms could be rolled-back amid a revival of resource nationalism have been prompted by leftist candidate Ciro Ferreira Gomes' pledges to expropriate oilfields auctioned off by President Michel Temer. Meanwhile, others cite the potential for contract term changes or slower oil auction calendars after a change in leadership following the vote in October.

The potential volatility of the situation was underlined in the lead-up to last week's round, with a debate in the State Assembly of Rio de Janeiro focusing on a potential withdrawal of tax incentives for oil and gas exploration and production. In a surprise last-minute decision, the National Accounts Court also removed two of the most promising blocks, saying their sale under a concession regime would cost the Brazilian government.

However, while the oil majors that bet big in last week's round mostly credited Brazil's geological potential, there is a growing confidence among that overall stability, and continued efforts to consolidate the positive upward trend, will trump the political risks.